Nifty under stress on electoral bond scam despite Modinomics optimism

Although Modi-3.0 is still almost certain, looking ahead Modi-4.0 may be tough if India’s real economic issues can’t be properly resolved

India’s benchmark stock index Nifty closed around 21817.45 Tuesday, slumped -1.08% after sliding -0.56% Friday. Overall, despite Modinomics optimism and the guarantee of Modi-III with 300+ seats (if not 370) this time, Nifty is under stress on the electoral bond (EB) scam as it has not only tarnished PM Modi’s      Godfather-like image of ‘honesty and crusader against corruption/Chowkidar’, but also several other regional and main opposition political parties (except Left/CPIM). The EB scam is legalized political bribery involving federal/state infra contracts and favoritism (including policy twist) for hefty donations (quid pro scheme) by various business houses/corporate entities.

As almost all political parties of India are involved in the EB scam, no one is out crying for PM Modi’s resignation, at least on moral responsibility. But in the eyes of FPIs/AEs (US/EU), India’s political and corporate governance image might get tarnished. But there could be further legal action of the corruption angle in the EB issues against political parties/governments, corporates, and investing agencies involved directly/indirectly amid increasing pressure by the SC under the present CJI (under corruption, money laundering, and other criminal activities).

Thus the need of the hour is transparent political/election funding (campaign finance) in a country like India, the world’s so-called largest democracy or mother of democracy, which is now turning into an electoral quashi-autocracy/banana republic. Also, official ‘white’ political funding through EB is only the tip of the iceberg and the unofficial black money funding by even big corporate houses instead of favoritism/nepotism may be huge, coming through the hawala (informal/unofficial) route; only around 5% of political expenditure is accounted through EB around Rs.0.20T; i.e. the overall size of Indian political funding/politics is around Rs.4-5T (after considering all big/regional/smaller political parties).

Corporations are not paying out of their pocket; they are paying against ‘business’, they are getting contracts, favors, and even favorable policy twists. India’s Rs.100T infra-fiscal stimulus (over five years) is a great source of corruption and subsequent political funding. This is also creating consistently elevated inflation and economic growth.

There could be a more damaging revelation for EBs on 21^st March, when ECI is scheduled to publish the ‘hidden serial number’ of those EBs, from where we may have direct links between donors and beneficiary political parties. Various political parties may also disclose ‘voluntarily’ by 20^th March, even before SBI/EC publication for the sake of their lost credibility/image. On 19^th March, Indian industry/corporate associations like FICCI, CII, and ASSOCHAM tried to block SC's directive to SBI for the revelation of the hidden serial number, but failed; SC asked SBI to comply by 21^st March.

In brief, the image of India as the world’s favorite investment destination has been tarnished as a result of the EB scam and Indian sovereign ratings/outlook may be reviewed negatively (for institutional weakness/corruption) if such EB/campaign finance scam continues in different forms without any suitable alternative to reduce the increasing power of corrupted money & muscle. Besides political funding reform, India has to also ensure proper judicial reform, so that corrupted money and muscle power can’t influence the judicial system.

There are also some controversies over EVM (voting machine) as it has a programmable chip that may be compromised. The solution is to return to the paper ballot system or deposit of VVPAT by the voter in a separate ballot box after executing the EVM button. Germany, which originally invented the present EVM machine, has already banned/discontinued EVM machines and using paper ballots. Similarly, Bangladesh and some other countries that were using such EVM machines, now also returned to paper ballots. U.S. is using a hybrid system of EVM/BMD/Optical scanner and physical VVPAT/Paper, which a voter can deposit of his/her own into a separate ballot box after executing EVM/BMD.

On the eve of the election, BJP may be on the back foot to some extent on account of the wrong electoral strategy regarding the sudden implementation of CAA (subsequent NRC, etc), EB scam/fiasco and appointments of two deputy election commissioners arbitrarily through a select committee comprising PM, HM/any cabinet colleague and LOP (Leader of Opposition), and not CJI as was the previous case.

Although PM Modi/BJP is set to return with a similar blockbuster majority in 2019 (around 300 LS seats) amid Modi’s Godfather-like image, matured political leadership, and development/anti-corruption/Hindutva platform, looking ahead, the 2029 General Election may be very tough for BJP amid increasing incumbent wave, unemployment and inflation and the fact that Modi will be around 80-years of age (although PM Modi now looks incredibly fit like in mid-mid-fifties, not seventies). But at the same time, opposition political parties led by INC should have a more mature and credible leader/face (Rahul Gandhi).

Overall, India now needs a strong national-level opposition political party, having an all-India organization like INC, not state-wise regional parties to compete with BJP at the national level. Presently, the BJP is fighting various regional parties in state legislative polls, but making alliances/settings with them at the national level directly or indirectly to retain the Federal government and also ‘friendly’ state governments. Two strong/big national-level political parties like BJP and Cong/INC will ensure checks & balances at all levels. For this, INC should also be transformed from a family organization to cadre cadre-based organized political party for equal opportunities for all party workers (like BJP/CPIM).

Now from politics to economics, on Tuesday (19^th March), RBI published its latest (March) bulletin on the Indian economy:

I. State of the Economy

The global economy is losing steam, with growth slowing in some of the most resilient economies and high frequency indicators pointing to further leveling in the period ahead. In India, real GDP growth was at a six-quarter high in Q3 2023-24, powered by strong momentum, robust indirect taxes, and lower subsidies. The high visibility of structural demand and healthier corporate and bank balance sheets will likely be the galvanizing forces for growth going forward. Even as inflation is on the ebb with broad-based softening of core inflation, the repetitive incidence of short amplitude food price pressures deters a swifter fall in headline inflation towards the target of 4 percent.

Most items in the indicators of industrial production, monetary/banking, payment system indicators, and merchandise trade and services record a seasonal peak around March, whereas the production of consumer durables, passenger vehicle sales and card payments peak in October reflecting festival demand.

CPI witnesses price pressure during the monsoon season, driven by vegetable prices. Fruit prices peak during the summer months.

Compared to the pre-COVID period, seasonal variation has increased for cash in hand and balances with RBI, production of primary goods, consumer goods, textiles, petroleum products, electricity production, passenger vehicle sales, and merchandise exports.

On 1^st March, S&P Global/HSBC final data shows India’s private Manufacturing PMI was revised higher to 56.9 in February from 56.7 in the preliminary reading, following a final 56.5 in January. It was the fastest growth in the factory sector since last September, as sales rose at the fastest pace since September, with new export orders growing the most in 21 months. Both output and new orders expanded at the quickest rate since September, helped by marketing efforts to boost demand.

In Feb’24, Australia, Bangladesh, Brazil, Canada, mainland China, Europe, Indonesia, the US, and the UAE were sources of manufacturing demand growth. Employment was little changed, as payroll numbers were sufficient for current requirements, purchasing activity rose the most in five months, and lead times on inputs were broadly stable. On the price front, input price inflation eased to the weakest since August 2020, while output cost inflation slowed to an eleven-month low. Finally, sentiment improved to the second-highest since December 2022 amid hopes of rising demand.

On 5^th March, S&P Global/HSBC final data shows India’s private sector Service PMI was revised downward to 60.6 in February from a preliminary reading of 61.5. The latest figure was also lower than January's six-month peak of 61.2, as new orders moderated but its growth rate stayed sharp. Paces of expansion were broadly similar at manufacturers and services firms, though the former logged acceleration and the latter witnessed a slowdown. On inflation, input prices rose at the slowest rate since August 2020, with the service sector seeing a sharper increase than its manufacturing counterpart. Prices charged went up at their softest pace in two years. Here, the faster rise was seen in manufacturing.

Finally, S&P Global/HSBC data shows India’s private sector composite PMI was revised downward to 60.6 in February from a preliminary reading of 61.5. The latest figure was also lower than January's six-month peak of 61.2, as new orders moderated but its growth rate stayed sharp. Paces of expansion were broadly similar at manufacturers and services firms, though the former logged acceleration and the latter witnessed a slowdown. On inflation, input prices rose at the slowest rate since August 2020, with the service sector seeing a sharper increase than its manufacturing counterpart. Prices charged went up at their softest pace in two years. Here, the faster rise was seen in manufacturing.

Comments by S&P Global/HSBC on Indian PMI and business/economic outlook:

India sees the largest improvement in growth expectations worldwide:

February marked a sharp improvement in sentiment, with output prospects the highest since October 2014. India marked the biggest improvement in sentiment amongst the 12 countries for which similar data is available. Expectations of profitability rose quickly. All of this led to plans for ramping up hiring. For now, elevated staff cost is keeping output price expectations on the higher side.

India’s services PMI suggests that the pace of expansion in the services sector eased in February from January. Due to a slowdown in growth in new orders and output, services companies’ outlook for future business activity, while remaining strongly positive, weakened slightly. Prices charged for services rose at the slowest rate in 24 months as input price inflation moderated.

The HSBC final India Manufacturing PMI indicates that production growth continued to be strong, supported by both domestic and external demand. Manufacturing firms’ margins improved as input price inflation slipped to the lowest since July 2020. Buoyed by robust demand and improving profit margins, manufacturers have an optimistic outlook about future business conditions.

Overall, as per the S&P Global/HSBC PMI survey, the Indian private sector economy is slowing down to some extent in Q4FY24 from the ‘bullet train’ speed of Q3 and Q2, but Indian private manufacturing companies may be enjoying now higher margin due to lower input cost inflation, although workers are now demanding higher wages due to consistently elevated inflation.

Overall, as per the Government/MOSPI/NSO advance estimate, India’s Q4FY24 real GDP should be around Rs.46.41T; i.e. a sequential growth of +6.15% and yearly growth of +6.40%; the FY24 real GDP (Rs.172.90T) growth would be around +7.59%. Over the last few quarters, there were surprisingly positive revisions in the GDP data (ahead of the 2024 election), which may be ‘adjusted’ in the coming years, while Modi admin is now targeting $7T nominal GDP by 2027-30 (?) from projected $3.55T in FY24. This translates to almost 97% growth in three years, which looks almost impossible at this stage. Even if we consider 5 years (from FY24 to FY29-next general election), it will translate to around +19.4% growth rate on average, which also looks very tough. India’s nominal GDP in LCU (local currency unit-INR) should grow around +20% CAGR along with limited inflation of around 4-5% and limited currency devaluation/stable USDINR.

The Modi admin took a target of $5T nominal GDP by FY24 from $2.71T in FY19; but failed mainly due to higher inflation (deflator) and higher USDINR; India’s projected nominal GDP for FY24 would be around $3.55T; i.e. around 31% growths in 5-years at an average rate of around +6.2%. On the other side, India’s real GDP has grown from around $2T to only $2.09 projected by FY24; i.e. only around +4.5% cumulative growth in 5 years at an average rate of only +0.9%, mainly due to COVID disruptions, high inflation/deflator and higher USDINR.

On the 16^th of March night, after the official announcement of the election schedule by the ECI, PM Modi appeared in the India Today conclave and pointed out Modi-3.0 era may stress on:

·         India to become world’s 3^rd largest economy; nominal GDP $10T by 2030 (?)

·         Huge Infra push led by transport-railways, roadways, and waterways

·         Bullet trains (HSR) and many more Vande Bharat (SHSR) trains

·         A stable and strong democracy

·         Space Programmes

·         Defense/Military export

·         Solar/EV

·         Semiconductor

As per PM Modi, cumulative fiscal stimulus in the last 5/10 years for some sectors:

·         Income tax rebate of around Rs.2.5T

·         Railway ticket rebate of around Rs.4.5T

·         Ayushman Bharat (Free Health Insurance) rebate of around Rs.1T

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (21883) now has to sustain over 21950/22050-21150/21200 for any recovery towards 22250/22350-22450/22550-22650* and further sustaining above 22700*, may scale 22850/23025 and 23260-23575-23700 levels in the coming days/weeks; otherwise sustaining below 21900/21840-21600*, Nifty Future may further fall to 21500/21375*-21325/21250*-21130/21000-20850, and further 20630/20460-20280/19730 and even 19400 levels in the coming days/weeks.

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